Model-Free International Stochastic Discount Factors
MIRELA SANDULESCU
Search for more papers by this authorCorresponding Author
FABIO TROJANI
Correspondence: Fabio Trojani, University of Geneva, 42 Bd du Pont d‘Arve, CH-1211 Geneva 4, Switzerland; e-mail: Fabio.Trojani@alphacruncher.com.
Search for more papers by this authorANDREA VEDOLIN
Mirela Sandulescu is with the University of Michigan, USI Lugano, and Swiss Finance Institute. Fabio Trojani is with the University of Geneva and Swiss Finance Institute. Andrea Vedolin is with Boston University, NBER, and CEPR. We thank Stefan Nagel (the Editor); Caio Almeida; Ric Colacito; Federico Gavazzoni; Tarek Hassan; Robert Kollmann; Matteo Maggiori; Thomas Maurer; Anna Pavlova; Carolin Pflueger; Alireza Tahbaz-Salehi; Ngoc-Khanh Tran; Raman Uppal; Adrien Verdelhan; Tony Zhang; the Alphacruncher Team; an Associate Editor; anonymous referees; and seminar and conference participants at the International Conference of the French Finance Association (Valence), SoFiE Annual Meeting at NYU, the International Finance Conference at Cass Business School, the SITE workshop “New Models of Financial Markets,” the Chicago Booth International Macro Finance Conference 2017, the ECB/Banca d'Italia/Norges Bank “Financial Determinants of Foreign Exchange Rates” conference, the 2018 Econometric Society Meetings in Philadelphia, the 2018 European Finance Association Meetings in Warsaw, the 2019 American Finance Associate Meetings in Atlanta, Boston University, University of Tilburg, VU Amsterdam/Tinbergen Institute, Université Catholique de Louvain, and McGill University for helpful comments. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorMIRELA SANDULESCU
Search for more papers by this authorCorresponding Author
FABIO TROJANI
Correspondence: Fabio Trojani, University of Geneva, 42 Bd du Pont d‘Arve, CH-1211 Geneva 4, Switzerland; e-mail: Fabio.Trojani@alphacruncher.com.
Search for more papers by this authorANDREA VEDOLIN
Mirela Sandulescu is with the University of Michigan, USI Lugano, and Swiss Finance Institute. Fabio Trojani is with the University of Geneva and Swiss Finance Institute. Andrea Vedolin is with Boston University, NBER, and CEPR. We thank Stefan Nagel (the Editor); Caio Almeida; Ric Colacito; Federico Gavazzoni; Tarek Hassan; Robert Kollmann; Matteo Maggiori; Thomas Maurer; Anna Pavlova; Carolin Pflueger; Alireza Tahbaz-Salehi; Ngoc-Khanh Tran; Raman Uppal; Adrien Verdelhan; Tony Zhang; the Alphacruncher Team; an Associate Editor; anonymous referees; and seminar and conference participants at the International Conference of the French Finance Association (Valence), SoFiE Annual Meeting at NYU, the International Finance Conference at Cass Business School, the SITE workshop “New Models of Financial Markets,” the Chicago Booth International Macro Finance Conference 2017, the ECB/Banca d'Italia/Norges Bank “Financial Determinants of Foreign Exchange Rates” conference, the 2018 Econometric Society Meetings in Philadelphia, the 2018 European Finance Association Meetings in Warsaw, the 2019 American Finance Associate Meetings in Atlanta, Boston University, University of Tilburg, VU Amsterdam/Tinbergen Institute, Université Catholique de Louvain, and McGill University for helpful comments. We have read The Journal of Finance disclosure policy and have no conflicts of interest to disclose.
Search for more papers by this authorABSTRACT
We provide a theoretical framework to uncover in a model-free way the relationships among international stochastic discount factors (SDFs), stochastic wedges, and financial market structures. Exchange rates are in general different from the ratio of international SDFs in incomplete markets, as captured by a stochastic wedge. We show theoretically that this wedge can be zero in incomplete and integrated markets. Market segmentation breaks the strong link between exchange rates and international SDFs, which helps address salient features of international asset returns while keeping the volatility and cross-country correlation of SDFs at moderate levels.
Supporting Information
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Replication Code. |
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